The European Banking Authority said on Thursday that it was formally investigating the Maltese Financial Intelligence Analysis Unit following a request by MEPs in February this year.

In a letter sent to MEPs, EBA chairperson Andrea Enria said that the EBA had decided to open a “formal Breach of Union Law Investigation in relation to the FIAU”.

According to the EBA, the investigation is based on the following preliminary assessment:

The manner in which the FIAU conducted its investigation and planned its supervisory activities in relation to Pilatus Bank, which it described as a high-risk institution that did not appear to have taken adequate steps in ensuring compliance with the 3rd Anti-money laundering directive, in particular the obligation for competent authorities to carry out effective monitoring.

The observation that the FIAU appeared to have failed to ensure that Pilatus Bank it put in place adequate and appropriate anti-money laundering and countering the financing of terrorism (AML/CFT) policies and procedures.

That the FIAU “never imposed effective, proportionate and dissuasive sanctions nor any other supervisory measures to correct the shortcomings it had identified” to ensure the bank’s compliance.

Based on these observations, the EBA said, it appeared that the FIAU had breached Articles 37 and 39 of the 3rd Anti-money laundering directive.

“In accordance with Article 17 of EBA’s founding Regulation and the EBA Rules of Procedure for Breach of Union Law Investigations, after giving to the FIAU the opportunity to express its views on the Report that we have sent to it, EBA Breach of Union Law Panel will be convened to decide whether there has been a Breach of Union Law and, if so, to propose some recommendations to the EBA Board of Supervisors for adoption,” Enria wrote in his letter.

He said the investigation was expected to take two months to conclude, and should be completed by mid-July.

On the Malta Financial Services Authority (MFSA), Enria told MEPs that he had sent a letter to the authority asking for additional information in relation to the EBA’s preliminary findings by 10 June.

“In particular, I asked the MFSA to provide information about the specific actions it has taken, or plans to take (within a specific timeline), in relation to some issues identified in the preliminary enquiry, such as the cooperation with the FIAU, the prudential supervision and interventions regarding authorization process, the internal controls and the business model of Pilatus Bank,” Enria said.

He added that the need for further action would be assessed on the basis of the MFSA’s reply.

FIAU committed to cooperating with EBA

In a statement published on Thursday evening, the FIAU “reiterated” its strong commitment to cooperating fully with the EBA, “in order to facilitate understanding of the facts of the Pilatus case and the steps taken to date”.

“In fact, the FIAU has already shared evidence of the regulatory activity it has undertaken with regard to Pilatus Bank and the changes it is making to its internal procedures. The FIAU remains confident that the evidence shows that it has not been in breach of Union law,” the unit said.

FIAU director Kenneth Farrugia was quoted saying that “while we acknowledge that we need to continue to improve, we believe no breaches in substance or in form can be attributed to the FIAU. We recognise that as a jurisdiction we must carry on working to strengthen our approach, not least to further enhance collaboration between the FIAU and the MFSA, and to review the boundaries of our respective competences”.

The unit said it had monitored the bank “intensively” since it was first made aware by the MFSA of potential concerns with the bank in late 2015. It said that it had conducted multiple on-site inspections, multiple on-site inspections, has maintained close on-going supervision of the institution, and has collaborated closely with judicial authorities and local and foreign law enforcement authorities.

Working closely with the MFSA, it said it had also commissioned an extensive third-party review, which is still underway, of Pilatus’ activities to build a definitive and comprehensive picture of what happened inside the bank.

“The FIAU is absolutely committed to protecting the people of Malta and our banking system from the threat of money laundering and financial crime. Europe faces a growing challenge with financial crime, and to meet it we have to strengthen our capabilities, from our inspection protocols to our IT infrastructure. We believe our supervision of Pilatus Bank was in line with European Union law and we look forward to working with the EBA to address their concerns. We will continue to cooperate with the national and European authorities in the Pilatus Bank case and in addressing the challenges of the increased financial crime risk facing Europe at this time,” Farrugia said.

Moreover, the FIAU pointed out that “isolated action” by itself or other regulatory authorities would not be sufficient to meet the challenge financial crime represents, adding that this would require cooperation and new frameworks and tools both at a national level and at European level.

“We believe the EBA and other European institutions should consider looking beyond the performance of specific institutions and focus on how prudential and financial crime supervision can be better integrated through changes to frameworks and wider reforms, both to remits and responsibilities and to potential structures, both at a national and EU level.”

FIAU Director, Kenneth Farrugia said, “Europe faces a growing threat from increasingly sophisticated ways of using its financial systems for financial crime, and Europe’s supervisory authorities and law enforcement agencies must continuously enhance their tools, technology, and resources to aid in the fight against financial crime.”

The FIAU said it was working continuously to strengthen the effectiveness of its supervision activities. It said that to combat the threat of financial crime, it had already undertake numerous initiatives such as promoting changes to Maltese law, deploying additional resources, reviewing protocols for cooperation with the MFSA and engaging third-party expertise.

Yannick joined MaltaToday as a journalist in 2016. His main areas of interest are politics...